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Political Risk Insurance Spikes After Egypt Unrest

Source: Risk & Insurance

Posted on 09 Feb 11

Unrest in Egypt has sent prices for political risk insurance coverage up by 12 percent to 15 percent for companies established there, and even higher for some professionals like journalists and photographers, a political risk coverage expert said on Friday, Feb. 4.

"People are doing 'panic buying,' and it is driving up demand," said Smita Malik, director of commercial insurance at Clements International, which underwrites international schools, nonprofits and nongovernmental organizations.

"Prices are going up," Malik said. Between Tuesday and Friday of last week, prices varied by as much as 20 percent for reporters. Indeed, a number of reporters have been injured, and even household names like CNN anchor Anderson Cooper and his crew have been involved in scuffles during the political protests in Egypt.

"Insurers and underwriters are already a bit concerned," Malik said. "Eventually, it will ebb and adjust." No one knows exactly when.

Malik added that primary insurance carriers and Lloyd's were re-examining their political risk policies as the fast-developing events in the Middle East reshape the risk exposures and available capacity.

Evan Freely, global head of Marsh's political risk and trade credit practice in New York, said the soft political risk market would begin to "pause a bit."

The first two months of the year have seen major--and largely unexpected--political upheavals in countries rated relatively stable by political experts. In mid-January, Tunisia President Zine al-Abidine Ben Ali fled the country following peaceful protests. In Egypt, protesters and pro-government supporters clashed over the future of President Hosni Mubarak. In Jordan, King Abdullah II dismissed the government and appointed a new prime minister.

In the 2011 edition of the political risk map issued annually by Aon, neither Tunisia, Egypt nor Jordan was among the list of nations downgraded.

GLOBAL CORPORATES IMPACTED

In Egypt the violence has left scores of people dead and hundreds injured, and unrest there has affected risk managers of global corporations too. Nissan, Daimler and

Heineken have opted to pull their employees out of the country.

The U.S. State Department on Feb. 1 advised all nonemergency U.S. government personnel to leave the country and has recommended that U.S. citizens "should consider leaving."

Industries most affected by the demonstrations include the hospitality sector, the oil and gas sector and the real estate sectors, according to Freely. The financial services and the business consulting sectors also have significant business-interruption exposures, as do shipping companies whose ships are delayed passing through the Suez Canal. Shipping companies are covered under marine policies.
Freely said that the political risk marketplace can supply coverage of up to about $1.2 billion in property and business-interruption damage for one asset--a hotel complex, for example, or a factory. The risk is reinsured through Lloyd's and Bermuda-based carriers, he said.

"These incidents in Egypt should cause every company with operations in emerging markets to re-evaluate the adequacy of their risk management strategies," Freely said.

"Companies need to have plans in place that can protect both colleagues and strategic assets."

Dominick Zenzola, vice president of employee benefits with Chubb, said that his company had received several inquiries about adding political evacuation coverage to their business travel policies.

"The average evacuation policy is inexpensive, and so it's not going to be a capacity issue," Zenzola said.

Chubb, a leading political evacuation underwriter, has received only once evacuation claim in connection with the Egypt unrest, Zenzola also said.

COVERAGE DISPUTES?

Though political risk coverage typically covers civil war, riots, strikes and civil unrest, that's not to say there isn't a coverage dispute lurking somewhere in the near future.

In political risk coverage disputes between carriers and their insureds, issues typically come up, in particular regarding timely notice, how much was actually lost and the cause of the loss, said Kirk Pasich, a Los Angeles-based partner in the insurance coverage practice of Dickstein Shapiro.

"There is a time limit and time delay issue for risk managers having to tell carriers," Pasich said. "People making the decision to shut down are not the insurance people, but you hope the risk management people are not finding out too much after the fact."

In court, insurance carriers have argued that the coverage didn't apply because risk managers failed to disclose to the underwriter the risks of doing business in foreign countries for which they were looking to purchase a policy, Pasich said, only to have risk managers retort that it is the carrier's responsibility to complete the due diligence before issuing the policy.